Britain will face "savage and ­swingeing" public spending cuts and a loss of economic sovereignty unless a start to reducing the record £178bn fiscal deficit is made this year, George Osborne warned tonight.

In an intensification of Tory warnings of the need for spending cuts – in the face of Labour claims that the party is diluting its plans – the shadow chancellor warned that financial markets will panic unless a "credible" plan to reduce the deficit is introduced this year.

Osborne pledged to make what the Tories are calling "in-year" public spending cuts by the summer if the party wins the election, in contrast to Labour, which plans to maintain real-term rises until 2011.

"A credible plan is not really credible unless you're prepared to make a start on it this year," Osborne said in the annual Mais lecture at the Cass Business School at City University London as he warned of how financial markets are alarmed by Labour's plans.

"Those who say we should simply ignore the markets are siren voices, ­luring us on to the rocks. For an economic policy maker to rail against the unpredictable nature of financial markets is like a farmer complaining about the weather. A loss of market confidence could force dramatic tax rises and spending cuts that were indeed savage and swingeing. That would represent a loss of economic sovereignty.

"And those cuts would be far larger than the actions that are needed now in order to retain our economic freedom in the first place. Far better to be prepared and protect ourselves against the storm."

Osborne's remarks show the Tories are determined to press ahead with their plans to cut the fiscal deficit this year. Labour says the Tories' plans are not credible because Osborne, who warned last year of the need to usher in an age of austerity, is planning to cut the £178bn fiscal deficit by just £1.5bn this year. The Tories toned down their rhetoric recently when it was confirmed that Britain is inching its way out of recession with growth of 0.1% in the final quarter of last year.

The shadow chancellor dismissed Labour's criticisms as he outlined three steps a Conservative government would take to restore Britain's credibility with the financial markets to ensure it does not lose its prized AAA credit rating. They are:

• Establishing, within days of an election win, a new and independent office of budget responsibility that would publish an audit of the public finances. "Only then will anyone know the true scale of the ­fiscal challenge that faces whoever forms the next government."

• Holding an emergency budget within 50 days of the election. Osborne would use this to set out the overall tax and spending levels over the next few years and outline immediate spending cuts on public ­sector pay.

• Holding a spending review in the autumn. Osborne would use this to set out the real-term cuts to public spending that would be introduced from the 2011-12 financial year. "We will not hesitate to take the difficult decisions to get Britain working," the shadow chancellor said.

Osborne was scathing about Labour's handling of the economy over the last decade as he mocked Gordon Brown's claims to have ended "boom and bust". He said: "Britain has been failed by the economic policy framework of the last decade. It promised stability, prudence and an end to the cycle. It delivered instability, imprudence and the biggest boom followed by the deepest bust."

Liam Byrne, the chief secretary to the Treasury, said: "The only thing [Osborne] made clear in the Mais lecture was that he's still ready to put economic recovery at risk. He wants to start cutting support to the economy now at the expense of jobs and public services."